Recordkeeping 1 2 3
A major objective of accounting in a business environment is to be in compliance with GAAP, Generally Accepted Accounting Principles. GAAPs include five standards:
1) The Entity Concept, which states that the records of a business entity should be kept separately from the personal records of the owner. In that regard, ensure that your client keeps separate accounts for business and personal purposes. The Statement of Owner's Equity can be easily prepared when the Entity Concept is followed. One of the main records is the Owner's Drawings that shows the amounts took from the business. When preparing the Owner's Equity it is important to show the amounts and sources of changes in capital during the period.
2) The Objectivity Principle, also called "Reliability Principle, emphasizes the responsibility of accountants providing accurate records and financial information. To meet this principle, train the business owner to ensure that he or she keeps receipts, invoices, deposit slips, insurance policies, etc. These documents should be organized chronologically, ensuring that online payments, credit card transactions are also taken into consideration.
3) The Cost Principle requires the entity to record assets and services at their historical cost. For example, if a manufacturing company paid $50,000 for a machine, it means that $50,000 is the amount recorded in the books even if an independent appraiser would value that machine for $65,000. Business owners need to keep the original invoices for each asset purchased along with the insurance policy.
4) The Going Concern Principle states that an entity will remain in operation for the foreseeable future. As such the proper measure of the assets own by the entity is the historical cost. If the entity were going out of business the relevant measure of its assets would be the market value. Once again, the importance of keeping original invoices is highlighted by this Accounting Principle.
5) The Stable-Monetary Unit Concept states that the purchasing power of the dollar is relatively stable. The message here is that the effects of inflation are ignored.
Direct your client to setup a permanent file that contains among others: the occupational license, the articles of incorporation, bylaws, leases’ documents, list of assets, insurances, and records of consultants/contractors. This is a good way to ensure that business owners get into the habit of keeping their entities organized and in accordance with Generally Accepted Accounting Principles. Educating a customer pays off. Don't underestimate the importance of explaining the implications of an adequate recordkeeping system.
This site needs an editor - click to learn more!
You Should Also Read:
Preparing Closing and Adjusting Entries
Budgeting and its Role in Decision Making
Drawing Conclusions from Financial Statements
Editor's Picks Articles
Top Ten Articles
Content copyright © 2022 by Consuelo Herrera, CAMS, CFE. All rights reserved.
This content was written by Consuelo Herrera, CAMS, CFE. If you wish to use this content in any manner, you need written permission. Contact BellaOnline Administration for details.